Savers struggling to stand still against march of inflation
With interest rates expected to stay low for years, there are few places to park your cash where it won't be steadily eroded. By Chiara Cavaglieri
Saturday 17 August 2013
Long-suffering savers and retirees must feel as though they can't catch a break, faced with news that they face continued low interest rates and climbing inflation. The bells of doom were already ringing after the Bank of England's latest Inflation Report, but with experts revealing this week that current levels of inflation could halve the real value of cash savings over 25 years, where can beleaguered savers turn?
Ever since interest rates were cut to just 0.5 per cent in 2009, savers have been scrabbling to find above-inflation returns on their deposits. Borrowers may have welcomed the Funding for Lending scheme, which sparked record low mortgage rates, but for anyone relying on cash savings it made a difficult situation even worse. Last week, the Bank's new governor, Mark Carney, warned that the base rate would not rise until UK unemployment fell below 7 per cent – which is expected to take another three years – and at the same time inflation was likely to remain above the Government's 2 per cent target for at least the next two.
The long-term effects of inflation on the spending power of your money can be catastrophic – since 2009 the consumer prices index (CPI) has risen by 14.87 per cent, while cash has risen by only 3.39 per cent. Annual CPI has now edged down to 2.8 per cent, but Adrian Lowcock at Hargreaves Lansdown explained that inflation at this level would still halve the value of your savings in 25 years.
"The Bank of England has forecast interest rates may remain low until 2016. If this is the case, savers can expect interest on their savings to remain below inflation for another three years," he said. "Inflation also affects our real income. With wages frozen, household incomes are being eaten away by inflation. Inflation matters to all of us, whether we are working or retired, savers or investors, as it measures the rate at which the costs of goods and services rise."
A basic-rate taxpayer would need to earn 3.5 per cent on their savings to beat the current level of inflation yet there is only one lonely account offering any respite, according to Moneyfacts – Skipton Building Society's Limited Edition Fixed Rate Branch Bond – a seven-year bond – paying 3.5 per cent. There isn't a single account paying the 4.66 per cent that higher-rate taxpayers would need to beat inflation.
If you don't want to lock your money away for such a long time, make the most of your annual individual savings account (Isa) allowance. Isa rates tend to be lower than standard savings but as returns have plummeted across the board, it is a struggle to find anything that matches the tax-free benefits. The Nationwide Flexclusive Isa is currently paying 2.25 per cent (including a 0.85 per cent bonus until December 2014) and can be opened with just £1, although you must hold a current account with the building society to apply. The Newcastle Big Home Saver Isa pays a slightly more generous 3 per cent AER, but you must pay in and make no withdrawals to get that rate, otherwise it falls to 2 per cent for that month.
Regular savers and even current account holders can find slightly more acceptable returns. The Santander 123 current account offers both cashback of up to 3 per cent on bills, and interest of up to 3 per cent on balances of more than £3,000 – beating any rival Isa on the market. First Direct also offers its current account customers a regular saver account paying a generous 6 per cent, fixed for one year. You can drip-feed £25-£300 a month but withdrawals are not permitted.
Even if you do manage to snap up a best buy, inflation cannot be ignored, particularly if you are approaching retirement. Annuity rates are already at an all-time low and inflation is compounding the problem for pensioners living on a fixed income and watching the value of their income fall away.
"Everyone will tell you buying an annuity is the safe thing to do but when you think about it, buying an annuity is a huge gamble," pensions specialist Dr Ros Altmann said. "In many ways it is the highest risk option that you will ever take, because you might lose all your capital. The income may have some kind of guarantee but that doesn't protect your capital and that income only lasts as long as you survive."
The stark reality is that with an annuity, you're putting all your eggs in one basket and if it's not right for you, there's no recourse and nowhere to go. If you have a small pension pot the first alternative to taking an annuity is to keep working, even if it's part time, so that you can earn more money, top up your state pension and keep economically active.
Downsizing your house could be another consideration but the real question is whether you're happy to simply put up with the fact that your spending power is taking a nosedive, or take on some investment risk in the hope of generating better returns.
"Cash simply isn't king in the current environment of low rates and above target inflation," said Jason Hollands at the financial adviser BestInvest. "While we all need some cash reserves for short term needs and emergencies, investors with a reasonable time horizon should look to shift some of this into riskier assets where there is a prospect of a real return after inflation."
Equities are volatile but they can offer some inflation-proofing if companies are able to grow their business and raise dividends. Global brands paying high dividends can offer a better chance of keeping up with inflation, and gold is still seen as a hedge against inflation, although its price has seen a sharp fall recently.
Hargreaves Lansdown recommends both Troy Trojan (which has exposure to gold and gold mining equities, inflation-linked US and UK government bonds, and cash) and Threadneedle UK Equity Alpha Income, which yields 3.6 per cent.
A financial adviser can help you build up a diverse portfolio of different asset classes to suit your personal circumstances and attitude to risk.
Rain doesn't stop profits at Andy Murray's £600-a-night hotel Cromlix House
Think twice about investing in fine wine - it's a vintage ploy for the fraudsters
Santander's Kitti app aims to bring the good old cash kitty into the 21st century
Five Questions On: GB Energy's new tariff
Bank-beating exchange rates on your international payments
- 1 Edward Heath 'raped 12 year-old boy at Mayfair flat'
- 2 Sabrina Corgatelli: US hunting tourist posts picture of herself with dead giraffe after Cecil the lion outrage
- 3 Porn block in India: hundreds of sexual websites banned, internet outraged
- 4 Gwen Stefani and Gavin Rossdale divorce: One of music industry’s most enduring couples announce split after 12 years of marriage
- 5 A-level results 2015: UK exam board OCR admits it 'estimates' hundreds of pupils' grades after papers 'go missing'
Is Britain really full up? Are migrants taking our jobs? Leading academic answers the most common anti-immigration claims
Calais Migrant Crisis: Deputy Mayor of Calais labels Cameron's use of 'swarm' as 'racist' and 'ignorant'
Chris Leslie: Jeremy Corbyn's anti-austerity agenda will harm the poor, says Labour shadow Chancellor
Landlords renting properties to illegal immigrants to face up to five years in prison
While we fixate on Calais, the Home Office is quietly deporting dozens of migrants on 'ghost flights'
Calais crisis: The seven claims made about the migrants - and the reality
iJobs Money & Business
£35 - £50k DOE: Guru Careers: A Tax Manager / Accountant (ACA / CA / CTA) is n...
£35000 - £37000 per annum + benefits: Ashdown Group: Contracts Executive - Cit...
£20000 - £25000 per annum + OTE £45K: SThree: SThree Group have been well esta...
£21000 per annum: Recruitment Genius: This is an exciting opportunity to join ...
Day In a Page
Built on a former chapel site, this impressive four-bedroom home boasts balconies, stunning views and contemporary modern living.
This three-bedroom house is situated in a quiet mews and set over three floors. Features include glazed staircases and high ceilings.
A period townhouse set over four floors, this five-bedroom home was built in the 18th Century and retains many original features.
With five bedrooms, this spacious home offers beautiful gardens and modern interiors - set within the popular market town of Bingley.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
In the pretty market town of Bungay, this grade II-listed Mill House is arranged over four floors, offering four bedrooms and three reception areas.
This first-floor flat comes with two bedrooms, an impressive open-plan reception room and two lovely roof terraces.
This five-bedroom home comes with a range of outbuildings including a large barn which could be converted into a self-contained granny-flat or rental.
Moored at Taggs Island and reached via a pretty garden, this two-bedroom houseboat has a vaulted reception room and skylit garden studio - currently a beauty salon.
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
A contemporary house spread over three storeys, this three-bedroom detached home has large sliding doors that open out to the River Quaggy.
Moored in Chelsea's Cheyne Walk, this houseboat offers two double bedrooms and a teak deck that's ideal for al-fresco dining.
This former village bakery, dating back to the 17th century, is now a three-bedroom detached home just a few miles from the East Sussex coast.
On the picturesque Isle of Man, this four-bedroom character home has a ground-floor shop that's currently run as a newsagents and a flat that would make an ideal holiday let.
In a new collection of flats, this first-floor two-bedroom apartment offers ample entertaining space and a prime view of Furze Green from a private balcony.
This three-bedroom stone-built cottage currently trades as the village store with a restaurant in the annexe and family accommodation on the upper floors.
Previously two semi-detached properties, this five-bedroom home is spread over three floors with a large breakfast kitchen, orangery, office and gym on the second floor.
This five-bedroom home enjoys countryside views over the Blyth estuary to Southwold, offering flexible living space with a ground-floor annexe - ideal for use as a holiday let.
Close to the market town of Eye, this four-bedroom detached home offers a double-height living room which takes the place of the original, 19th-century, chapel nave.
Dating back to the 19th century, this four-bedroom home needs modernising. Spanning three storeys, the red-brick house has a fireplace, a small terrace and a cellar.
Just outside of Cambridge, this single-storey home offers three double bedrooms, a living room with vaulted timber ceiling and ladder steps that lead to a mezzanine study area.
This six-bedroom Georgian home is on three floors with open fireplaces, a two oven Aga, an annexe, and cottage gardens with outbuildings and a car barn.
A former coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, an attached office, kennels and an outbuilding that's currently used as a gym.
Located beside an impressive Victorian viaduct, this four-bedroom home has an open-plan living area that is glazed on two sides, with skylights and high ceilings.
A former furniture workshop, this three-bedroom home has high ceilings and painted brick walls, in a village setting only fifteen miles from the coast.
This five-bedroom stone townhouse features a pine staircase and an Inglenuk fireplace, double doors from the lounge give access to an enclosed courtyard.
This five-bedroom, detached home blends traditional and modern design; the sleek kitchen features a gas hob and oven set within an exposed chimney breast.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B or countryside retreat, subject to change of use permissions.
This Grade II-listed three-bedroom home is situated on a private road, just a short walk from the sandy beaches of Frinton-on-Sea.
Less than five miles from Malmesbury, this four-bedroom cottage comes with equestrian facilities and gardens that extend to approximately three acres.
Spanning three storeys, this late-Victorian five-bedroom farmhouse is a spacious family home with a modern interior and B&B potential.
With an original church arch, this triplex one-bedroom church conversion has a light, spacious, feel and comes with a secure off-street parking space.
This recently-refurbished three-bedroom home has bi-folding doors that lead out to a decked seating area - ideal for alfresco dining this summer.
Well-located for coastal walks and popular restaurants, this detached four-bedroom home offers views over farmland, to the Solent, the Purbecks and Bournemouth.
If you love high ceilings, school conversions like this one are bang on the money. This two-bedroom flat is minutes from Burgess Park and the foodie haven at Borough Market.
Set within a church conversion in Bermondsey, this two-bedroom maisonette combines existing features, such as original arches and brickwork, with a contemporary finish.
This four-bedroom Edwardian home offers a combination of original features and contemporary design after a renovation by the current owners.
This four-bedroom home offers a vaulted ceiling in a breakfast room that's ideal for summer entertaining with doors that open to the patio and garden.
On the market for the first time in more than 50 years, this six-bedroom home is a project with vast potential - spread over three floors of living space.
Surrounded by rolling countryside, this four-bedroom barn conversion comes with a self-contained, one-bedroom annexe that could serve as an office or a holiday let.
Located near Harrogate town centre, this five-bedroom Victorian terrace is arranged over three storeys while a current study serves as an optional sixth bedroom.
A ground-floor flat in a country house, located a mile from Sway; this two-bedroom home would make an ideal weekend retreat on the edge of the New Forest.
On a popular residential lane in Caterham on the Hill, this four-bedroom family home offers a secluded garden and a convenient location for local schools and public transport.
Just a short walk from Westerham green, this three-bedroom cottage has a light kitchen with exposed brickwork and double doors that lead to a south-facing garden.
In a prime spot opposite the River Thames, this one-bedroom flat has an 18sq ft reception room with glass doors that open out to a private terrace.
Set in the hills above Llanwrda Village, west Wales, this 18th-century three-bedroom farmhouse has holiday-let potential from a separate barn conversion and annexe.
This charming end-of-terrace townhouse is arranged over three floors, with two double bedrooms and a private courtyard garden located at the rear of the property.